rules of conduct

WTO Dispute Settlement — How to Handle Allegations That an Appellate Body Member is Affiliated with a Government and Hence Not Properly an Appellate Body Member?

In the first twenty-five years of the World Trade Organization, there have generally been few challenges to Appellate Body members in terms of violations of their obligations under Art. 17.3 of the Dispute Settlement Understanding or of the Rules of Conduct, WTO/DSB/RC/1.

The dispute brought by Canada against a countervailing duty order issued by the United States on supercalendered paper from Canada has resulted in such an issue arising. The WTO summary of the case is contained here, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds505_e.htm. The Appellate Body Report was circulated on February 6, 2020 under the document number WT/DS505/AB/R.

The United States had taken an appeal from certain aspects of the panel report. At the Dispute Settlement Body meeting of February 26, 2020, the U.S. had objected to the DSB considering the Appellate Body report as invalid for various reasons, including the fact that two of the three AB members’ terms had expired and had not received authorization from the DSB to continue to participate in appeals, that the report was issued far beyond the maximum 90 days laid out in the DSU (Art. 17.5 of the DSU). Most importantly, the United States claimed that the third person hearing the appeal was in fact affiliated with a government in contravention of DSU 17.3 and that her participation in the appeal was inappropriate for that reason and the fact that many of the cases relied upon by Canada to establish a practice were cases involving the government of China, the government with which the AB member was allegedly affiliated creating justifiable doubts as to the person’s independence or impartiality (WT/DSB/RC/1, Art. III.1). The U.S. position was that in light of the problems, the only consensus possible would be a positive consensus and that the U.S. would agree to a positive consensus on certain findings by the panel that were not appealed by the U.S.

Canada, the EU, and China all made comments at the DSB meeting in late February. Canada argued that despite the allegations raised by the US which should be looked at but not in the context of a DSB meeting, the DSB would adopt the Appellate Body report absent negative consensus. China agreed and defended the Appellate Body member who was from China. The EU reviewed procedures for raising the types of allegations raised by the US but like Canada and China viewed the DSU as mandating adoption of the AB report where a negative consensus did not exist.

The U.S. did not agree that adoption was permitted or appropriate and continued to oppose. The WTO webpage coverage of the dispute view the AB and panel reports as adopted on 5 March 2020. The minutes of the WTO DSB meeting of February 28 and March 5, 2020 are presented in WT/DSB/M/441 at pages 18-25 (14 May 2020). The document is embedded below and the reader is encouraged to read the discussion on those pages in full to understand the competing positions of the parties and major third parties.

WTDSBM441

While the Rules of Conduct describe a process for presenting information “of a material violation of the obligations of independence, impartiality, or confidentiality or the avoidance of direct or indirect conflicts of interest by covered persons which may impair the integrity, impartiality or confidentiality of the dispute settlement mechanism,” parties are told “at the earliest possible time and on a confidential basis, submit such evidence to the Chair of the DSB, the Director-General or the Standing Appellate Body, as appropriate.” WT/DSB/RC/1 Art. VIII.1. Paragraph 2 of Art. VIII says that the alleged failure to disclose by itself is not a sufficient ground for disqualification “unless there is also evidence of a material violation of the obligations of independence, impartiality, confidentiality or the avoidance of direct or indirect conflicts of interests and that the integrity, impartiality or confidentiality of the dispute settlement mechanism would be impaired thereby.”

Paragraphs 14-17 address how to address alleged violations by a member of the Appellate Body basically calling for the information to be shared with the other party to the dispute and to the Standing Appellate Body.

But the basic premise of the Rules of Conduct is that allegations and resolutions will occur before the panel or Appellate Body process is complete to permit time to substitute a new panelist or an Appellate Body member into the dispute before final resolution.

Challenges of the Supercalendered Paper case

After December 10, 2019, there was only one Appellate Body member. The United States communicated with the Director-General of the WTO and the Chair of the Dispute Settlement Body (the other two entities to whom evidence of possible violations could be sent if other than an Appellate Body member) on January 30, 2020 about the alleged violation of the one remaining AB member as she was affiliated with the government of China and the case, while brought by Canada involved mainly cases in which China was involved. While the evidence wasn’t sent to the Standing Appellate Body, that was not a practical option under the circumstances.

It is unclear whether the Director-General or the Chair of the Dispute Settlement Body did anything with the information provided. Certainly, no action was expeditiously undertaken to permit a resolution of the allegation before the time when the DSB would take up the Appellate Body Report and panel report. There is no reference in the minutes of the March 5, 2020 meeting to any action being taken.

The position of Canada and the EU was that the U.S. would have to wait until the Appellate Body was functioning again to have the issue reviewed. Yet such an approach is counter to the need to determine whether a material violation has occurred expeditiously so that corrective action (e.g., replacement of AB member or panelist) could occur if appropriate.

What is clear is that a system which doesn’t permit the timely evaluation of allegations against the propriety of an Appellate Body member, a panelist or other individual involved in the dispute settlement system, serving on a dispute weakens the integrity of the system and the perceived impartiality of the AB members and panelists.

Nor have Canada, the EU, China or others identified what a later review of allegations would permit in terms of correction of the particular dispute if the allegations are deemed to be confirmed. Nor do the Rules of Conduct seem to provide for retroactive correction of earlier disputes where a panelist or Appellate Body with a demonstrated serious violation of obligations served (and hence either there may have been a split decision on certain issues if there was a dissenting view and where you would not have had three proper AB members participate).

One would assume that the U.S. will make addressing these shortcomings in the existing system part of what needs to be addressed before the Appellate Body is reconstituted.

Continuing saga

Despite the fact that Canada agrees that the U.S. has raised serious issues, Canada has sought rights to retaliation and the topic was discussed at Monday’s Dispute Settlement Body meeting (June 29, 2020). The WTO press release on the meeting included this summary of the discussion of supercalendered paper:

“Paper from Canada

“Canada noted its request to suspend concessions against the United States for the US failure to comply with the WTO’s ruling in DS505. Canada said the US has neither informed the DSB of its intentions in regard to complying with the ruling, nor has it proposed a reasonable period of time to ensure compliance. Thus, Canada was pursuing its right to retaliate.

“The United States objects to the premise that the DSB adopted the ruling in this dispute on 5 March. The US position is that there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the ruling. The report was not valid for three reasons: 1) the ruling was issued after the 90-day deadline set under the Dispute Settlement Understanding (DSU); 2)
two of the Appellate Body members were not authorized by the DSB to continue working on the case after their terms as members expired; and 3) the third Appellate Body member — Hong Zhao of China — was disqualified from serving as a member because she currently serves as vice president of an academy which is a public institution under Chinese law and subordinate to China’s Ministry of Commerce (MOFCOM), and thus she was neither independent nor impartial.

“The US also said Canada was not suffering any trade impact from the measures in question, particularly since the countervailing duties had been removed two years earlier. Nevertheless, the US said it had objected to the Canadian request on 26 June, meaning that the matter is automatically referred to WTO arbitration.

“Canada was joined by China, the EU, Japan, Australia and Mexico in rejecting the notion that the Appellate Body ruling in DS505 was not valid and that the DSB never adopted the ruling. Canada said the minutes of the DSB meeting on 5 March show that the ruling was adopted on the basis of Article 17.14 of the DSU, whereby a ruling can only be rejected if all WTO members present agree to reject it. Canada added that its request is based on a formula to ensure that retaliation can be exercised only if and when the US applies its WTO-inconsistent ongoing conduct to imports from Canada in the future.

“China rejected the accusations that Ms Zhao was not impartial and independent, declaring that the Chinese institute with which she is affiliated is an independent legal entity, and that the US raised no objections to her when she was first appointed to the WTO, nor when she was involved in rulings that were favorable to the United States.

“The US countered that China has not denied US statements regarding Ms Zhao’s affiliation with the institute and its affiliation with, and financial support from, MOFCOM.”

https://www.wto.org/english/news_e/news20_e/dsb_29jun20_e.htm.

The United States releases its statement to the Dispute Settlement Body meetings on the US Mission Geneva webpage. See Statement of the United States at the Dispute Settlement Body Meeting, Geneva, June 29, 2020, https://geneva.usmission.gov/wp-content/uploads/sites/290/Jun29.DSB_.Stmt_.as-deliv.fin_.public13218.pdf The relevant portion (pages 20-24) of the U.S. statement this past Monday is copied below.

“12. UNITED STATES – COUNTERVAILING MEASURES ON SUPERCALENDERED PAPER FROM CANADA

“A. RECOURSE TO ARTICLE 22.2 OF THE DSU BY CANADA (WT/DS505/13)

“ On June 18, 2020, Canada filed a request that the DSB authorize Canada to suspend concessions because it considers that the United States failed to comply with the recommendations of the DSB.

“ The United States objects to the premise of Canada’s request, which is that the DSB adopted recommendations in this dispute on March 5, 2020. As we will explain again, the position of the United States is that no DSB recommendation was or could be adopted because there was no valid Appellate Body report, and there was no consensus for the DSB to adopt the reports.

“ The United States has also repeatedly expressed concern that Canada continues to pursue a dispute that has no real world effect on Canadian exporters – a fact conceded by Canada’s recent request.

“ Canada’s request asks for authorization based on speculation – that is, related to an alleged nullification or impairment that occurs ‘if the ‘ongoing conduct’ continues to exist and [if it] applies to exports from Canada in the future’.

“ Canada is unable to even assert that it suffers from any nullification or impairment today because the alleged conduct is not applied to any Canadian good.

“ Only one determination in this dispute involved Canada – Supercalendered Paper – and that countervailing duty order was revoked two years ago.

“ Therefore, Canada suffers no nullification or impairment from the alleged measure, nor can it say that the alleged measure continues to exist, nor that Canada will suffer nullification or impairment in the future.

“ Nevertheless – and without prejudice to the U.S. position that no recommendations were adopted by the DSB – by letter dated June 26, 2020, the United States also objected to the level of suspension of concessions or other obligations proposed by Canada.

“ Under Article 22.6 of the DSU, the filing of the objection by the United States automatically results in the matter being referred to arbitration. Article 22.6 does not refer to any decision by the DSB, and no decision is therefore required or possible.

“ Consequently, because of the U.S. objection under Article 22.6, the matter already has been referred to arbitration. Although unnecessary, the DSB may take note of that fact and confirm that it may not therefore consider Canada’s request for authorization.

“ The United States recalls that at the March 5, 2020, DSB meeting, we did not join a consensus to adopt the reports put forward. There were multiple reasons why the appellate document was not a valid Appellate Body report under Article 17 of the DSU. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; second, the report was not issued within 90 days, as required by Article 17.5; and third, one person serving was affiliated with the Government of China, and therefore was not a valid member of the Appellate Body under Article 17.3.12

“ Indeed, separate from this dispute, on January 31, 2020, the United States informed the WTO Director-General and the DSB Chair by letter of discovered information that disqualified a Chinese national, Ms. Zhao, from the Appellate Body.

“ At the March 5 meeting, the United States detailed for Members the evidence demonstrating that Ms. Zhao is not “unaffiliated with any government.” No information has been presented, before, during, or after the March 5 DSB meeting that contradicts that evidence.

“ Because of Ms. Zhao’s affiliation with the Government of China, the appellate document is not a valid Appellate Body report because it had not been provided and circulated on behalf of three Appellate Body members, as required under DSU Article 17.1.

“ At the March 5 DSB meeting, Canada agreed that the allegations of Ms. Zhao’s lack of independence are serious and stated that they deserve full and impartial consideration. Canada asserted that the Rules of Conduct addressed such situations.

“ The United States agrees with Canada’s apparent concern that Ms. Zhao’s participation in the appeal may also be inconsistent with the Rules of Conduct.

“ The procedures under the Rules of Conduct for the Appellate Body itself to conduct an inquiry are not available in current circumstances. However, this does not mean that no inquiry may be conducted. To the contrary, in general the Rules provide for the DSB Chair or the Director-General to conduct the relevant inquiry.

“ The DSB Chair and Director-General would be natural leaders of such an inquiry given their roles in the WTO dispute settlement system and the trust Members repose in them.

“ The United States notes that the conduct at issue also would have constituted a breach of the obligation in DSU Article 17.3 to avoid a direct or indirect conflict of interest.13 Ms. Zhao was demonstrably connected with the Chinese Government, which had a direct interest in this appeal as the “ongoing conduct” complained of related almost exclusively to China.14 This reinforces the importance of an alternative form of ethical inquiry.

“ Therefore, given Canada’s acknowledgement of serious issues of independence and impartiality, the United States would support an alternative inquiry under the Rules of Conduct.

“ Even aside from the fact that Ms. Zhao was not a valid Appellate Body member under DSU Article 17.3, such an inquiry would confirm her disqualification from serving on the appeal.

“Second Intervention

“ Canada asserts that the appellate report must have been adopted by negative consensus. But it is evident that not any document issued with the title “Report of the Appellate Body” is such a document. For example, if such a document were signed by three members of the Appellate Body Secretariat, no one would seriously argue the report must be adopted by the DSB by negative consensus. That is because the alleged “Report” would not be consistent with DSU Article 17, which requires an appeal to be decided by three Appellate Body members.15

“ In this dispute, the facts are not seriously contested. First, the DSB had taken no action to permit two ex-AB members to continue to serve after their terms expired; this is evident from the fact that no such decision was ever proposed to the DSB.

“ Second, the report was not issued within 90 days, as required by Article 17.5; this too is not contested.

“ Third, one Appellate Body member was affiliated with the Government of China; as the United States has pointed out, the evidence of affiliation brought forward by the United States has not been directly contested. Therefore, this affiliated person was not a valid member of the Appellate Body under Article 17.3.

“ Given that there was no valid Appellate Body report before the DSB, the document could not be adopted by negative consensus under Article 17.14 as that rule did not attach to this document. Therefore, the DSB could only adopt the document by positive consensus. The United States made clear at the DSB meeting that it objected and did not join a consensus on adoption.

“ As there was no consensus for adoption, the DSB did not adopt any reports in this dispute. Accordingly, there was no recommendation for the United States to bring a measure into conformity with a covered agreement.

“ Regarding Canada’s comments concerning application of the Rules of Conduct, we note these rules were agreed by Members in order to help preserve the integrity and impartiality of the WTO dispute settlement system. That does not mean that the Rules are all that is necessary to do so. Rather, first and foremost, it is for WTO Members, and all participants in the system, to take responsibility for safeguarding that system.

“ When Canada says only the Appellate Body may apply the obligations of impartiality and independence to a person serving on an appeal, and therefore the Rules cannot be applied now, Canada would actually use the Rules to undermine the integrity and impartiality of the WTO.

“ If there are valid ethical concerns with the service by a person in an appeal, they should be investigated. It would be thoroughly inconsistent with our experience and close relationship with Canada to see it defend the behavior of the Chinese official in this dispute.

“ And there is no question that Ms. Zhao’s professional connections with the Government of China raise serious ethical concerns. For instance, given Ms. Zhao’s professional connections with the Government of China, her participation in the appeal is not consistent with the obligations to be ‘independent and impartial’ and ‘avoid direct or indirect conflicts of interest,’ provided for in paragraph II:1 of the Rules of Conduct.16

“ We therefore look forward to further conversations with Canada to find a shared approach through which we can maintain the integrity and impartiality of WTO dispute settlement.

“ At the March 5 DSB meeting and again today, China has responded to the evidence explained by the United States. Importantly, and revealingly, China has not denied the following:

“o Ms. Zhao serves as Vice President of MOFCOM-AITEC.

“o Ms. Zhao receives or has received a salary for her position of Vice President.

“o MOFCOM-AITEC is an “affiliated” entity “subordinate” to MOFCOM.

“o MOFCOM-AITEC’s budget is part of MOFCOM’s budget, such that the salary for Ms. Zhao’s Vice President position at MOFCOM-AITEC is funded by the Government of the People’s Republic of China.

“ The fact that China did not deny these statements or assert that they are incorrect only confirms that Ms. Zhao is affiliated with the Government of China and is therefore not a valid member of the Appellate Body.

“12 See U.S. Statement at the March 5, 2020, Meeting of the Dispute Settlement Body (Item 8).

“13 See DSU Art. 17.3 (“They [persons serving on the Appellate Body] shall not participate in the consideration of any disputes that would create a direct or indirect conflict of interest.”).

“14 See United States – Countervailing Measures on Supercalendered Paper from Canada (Panel), WT/DS505/R, para. 7.295 and Tables 1-4 (seven of nine proceedings involving China).

“15 DSU Art. 17.1 (“The Appellate Body shall hear appeals from panel cases. It shall be composed of seven persons, three of whom shall serve on any one case.”).

“16 Rules of Conduct, Section II (“Governing Principle”), para. 1 (“Each person covered by these Rules … shall be independent and impartial [and] shall avoid direct or indirect conflicts of interest . . . so that through the observance of such standards of conduct the integrity and impartiality of that mechanism are preserved.”).”

Conclusion

The dispute settlement system at the WTO is facing challenges flowing from long standing concerns about the Appellate Body conforming to the limited role given it by the Dispute Settlement Understanding, the expansive reading of the Appellate Body’s role by AB members over time and the largely ineffective negotiating function of the WTO which has prevented meaningful oversight of the Appellate Body by WTO Members.

Added to the longstanding concerns raised by the United States and others comes a concern that goes to the heart of the dispute settlement system’s legitimacy — the need for impartial decision making and how to ensure prompt resolution of allegations of violations of obligations by AB members or panelists. The allegations against the remaining Appellate Body member raised by the United States in the supercalendered paper dispute have not been addressed by the Director-General of the WTO or by the Chair of the Dispute Settlement Body. Other WTO Members seem to be willing to see challenged reports adopted instead of having allegations pursued. Adopting a report put out by the AB including the challenged member and Canada’s pursuit of retaliation rights make a mockery of a properly functioning system and will do lasting harm to the DSB’s legitimacy. And so the downward spiral at the WTO continues in its dispute settlement function.